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| ADI > SEC Filings for ADI > Form 10-K on 27-Nov-2012 | All Recent SEC Filings |
27-Nov-2012
Annual Report
During the first quarter of fiscal 2008, we sold our baseband chipset business
and related support operations, or Baseband Chipset Business, to MediaTek Inc.
and sold our CPU voltage regulation and PC thermal monitoring business to
certain subsidiaries of ON Semiconductor Corporation. The financial results of
these businesses are presented as discontinued operations in the consolidated
statements of income for all periods presented. Unless otherwise noted, this
Management's Discussion and Analysis relates only to financial results from
continuing operations.
Results of Operations
Overview
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change % Change $ Change % Change
Revenue $ 2,701,142 $ 2,993,320 $ 2,761,503 $ (292,178 ) (10 )% $ 231,817 8 %
Gross Margin % 64.5 % 66.4 % 65.2 %
Net income from
Continuing
Operations $ 651,236 $ 860,894 $ 711,225 $ (209,658 ) (24 )% $ 149,669 21 %
Net income from
Continuing
Operations as a % of
Revenue 24.1 % 28.8 % 25.8 %
Diluted EPS from
Continuing
Operations $ 2.13 $ 2.79 $ 2.33 $ (0.66 ) (24 )% $ 0.46 20 %
Diluted EPS $ 2.13 $ 2.81 $ 2.33 $ (0.68 ) (24 )% $ 0.48 21 %
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Fiscal 2012 was a 53-week year. Fiscal 2011 and fiscal 2010 were 52-week years.
The additional week in fiscal 2012 was included in the first quarter ended
February 4, 2012.
The year-to-year revenue changes by end market and product category are more
fully outlined below under Revenue Trends by End Market and Revenue Trends by
Product Type.
During fiscal 2012, our revenue decreased 10% compared to fiscal 2011. Our
diluted earnings per share from continuing operations decreased to $2.13 in
fiscal 2012 from $2.79 in fiscal 2011. Cash flow from operations in fiscal 2012
was $814.5 million, or 30.2% of revenue. During fiscal 2012, we received $191.2
million in net proceeds from employee stock option exercises, repurchased a
total of approximately 4.2 million shares of our common stock for an aggregate
of $160.5 million, distributed $344.7 million to our shareholders in dividend
payments, paid $56.5 million in principal payments related to our $145.0 million
term loan facility, paid $132.2 million for property, plant and equipment
additions and paid $24.2 million, net of cash acquired, for the acquisition of
Multigig. In addition, we paid $1,183.5 million for the net purchase of short
term available-for-sale investments. These factors contributed to the net
decrease in cash and cash equivalents of $876.3 million in fiscal 2012.
The year-to-year decrease in revenue and profitability for fiscal 2012 was
primarily the result of continued slowdown in the growth of the global economy.
Our customers were increasingly cautious through the year and reduced the
inventory levels of our products. We believe that our variable cost structure
and continued efforts to manage production, inventory levels and expenses helped
to mitigate the effect that these lower sales levels had on our earnings.
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of
revenue by end market is determined using a variety of data points including the
technical characteristics of the product, the "sold to" customer information,
the "ship to" customer information and the end customer product or application
into which our product will be incorporated. As data systems for capturing and
tracking this data evolve and improve, the categorization of products by end
market can vary over time. When this occurs, we reclassify revenue by end market
for prior periods. Such reclassifications typically do not materially change the
sizing of, or the underlying trends of results within, each end market.
2012 2011 2010
% of % of % of
Total Total Total
Product Product Product
Revenue Revenue Y/Y% Revenue Revenue Revenue Revenue
Industrial $ 1,240,344 46 % (12 )% $ 1,411,386 47 % $ 1,280,027 46 %
Automotive 463,577 17 % 11 % 417,929 14 % 335,163 12 %
Consumer 467,626 17 % (16 )% 559,142 19 % 605,541 22 %
Communications 529,595 20 % (12 )% 604,863 20 % 540,772 20 %
Total Revenue $ 2,701,142 100 % (10 )% $ 2,993,320 100 % $ 2,761,503 100 %
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Industrial - The year-to-year decrease in revenue from fiscal 2011 to fiscal
2012 in industrial end market revenue was primarily the result of a broad-based
decrease in demand in this end market related to ongoing global macro-economic
weakness. The year-to-year decrease was most significant for products sold into
the industrial automation and instrumentation sectors. The year-to-year increase
in revenue from fiscal 2010 to fiscal 2011 in industrial end market revenue was
primarily the result of a broad-based increase in demand in this end market,
which was most significant for products sold into the automation and
instrumentation sectors and, to a lesser extent, products sold into the energy
and healthcare sectors.
Automotive - The year-to-year increase in revenue from fiscal 2011 to fiscal
2012 in automotive end market revenue was primarily the result of an increase in
the electronic content in automobiles used in infotainment applications and to a
lesser extent in power train and safety applications and a general increase in
demand by our customers. The year-to-year increase in revenue from fiscal 2010
to fiscal 2011 in automotive end market revenue was primarily the result of a
general increase in the electronic content found in vehicles and, to a lesser
extent, a general increase in demand by our customers.
Consumer - The year-to-year decrease in revenue from fiscal 2011 to fiscal 2012
in consumer end market revenue was primarily the result of a broad-based
decrease in demand for products sold in this end market. The year-to-year
decrease in revenue from fiscal 2010 to fiscal 2011 in consumer end market
revenue was primarily the result of a decrease in demand for products in the
digital camera and home entertainment sector primarily as a result of the impact
of the earthquake and tsunami that occurred in Japan in March 2011, partially
offset by an increase in demand for products used in portable devices in this
end market.
Communications - The year-to-year fluctuations in communications end market
revenue for the years presented are primarily the result of broad-based demand
shifts in this end market, which were most significant for products sold into
the wireless base station end market sector.
Revenue Trends by Product Type
The following table summarizes revenue by product categories. The categorization
of our products into broad categories is based on the characteristics of the
individual products, the specification of the products and in some cases the
specific uses that certain products have within applications. The categorization
of products into categories is therefore subject to judgment in some cases and
can vary over time. In instances where products move between product categories,
we reclassify the amounts in the product categories for all prior periods. Such
reclassifications typically do not materially change the sizing of, or the
underlying trends of results within, each product category.
2012 2011 2010
% of % of % of
Total Total Total
Product Product Product
Revenue Revenue* Y/Y% Revenue Revenue Revenue Revenue
Converters $ 1,192,064 44 % (11 )% $ 1,343,487 45 % $ 1,295,700 47 %
Amplifiers/Radio
frequency 697,687 26 % (11 )% 788,299 26 % 701,557 25 %
Other analog 397,376 15 % (3 )% 410,323 14 % 334,663 12 %
Subtotal analog signal
processing 2,287,127 85 % (10 )% 2,542,109 85 % 2,331,920 84 %
Power management &
reference 182,134 7 % (16 )% 217,615 7 % 194,740 7 %
Total analog products $ 2,469,261 91 % (11 )% $ 2,759,724 92 % $ 2,526,660 91 %
Digital signal
processing 231,881 9 % (1 )% 233,596 8 % 234,843 9 %
Total Revenue $ 2,701,142 100 % (10 )% $ 2,993,320 100 % $ 2,761,503 100 %
_____________________________________
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The year-to-year fluctuations in total revenue for the years presented were the
result of a broad-based demand shift across all product categories.
Revenue Trends by Geographic Region
During fiscal year 2012 we changed our method for classifying revenue by
geographic region to more accurately reflect the primary location of our
customers' design activity for our products. Prior periods have been
reclassified to align with this definition. In general, the prior classification
method reflected the customers' manufacturing location or the distributors'
stocking territory. No changes have been made to our revenue recognition policy.
A breakdown of our fiscal 2012, 2011 and 2010 revenue by geographic location
follows.
Change
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change % Change $ Change % Change
United States $ 818,653 $ 866,142 $ 794,463 $ (47,489 ) (5 )% $ 71,679 9 %
Rest of North and South
America 114,133 144,585 134,327 (30,452 ) (21 )% 10,258 8 %
Europe 852,668 967,417 816,561 (114,749 ) (12 )% 150,856 18 %
Japan 333,558 398,587 433,706 (65,029 ) (16 )% (35,119 ) (8 )%
China 341,196 360,594 320,739 (19,398 ) (5 )% 39,855 12 %
Rest of Asia 240,934 255,995 261,707 (15,061 ) (6 )% (5,712 ) (2 )%
Total Revenue $ 2,701,142 $ 2,993,320 $ 2,761,503 $ (292,178 ) (10 )% $ 231,817 8 %
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In fiscal years 2012, 2011 and 2010, the predominant countries comprising "Rest of North and South America" are Canada and Mexico; the predominant countries comprising "Europe" are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising "Rest of Asia" are Taiwan and South Korea. Sales decreased in all regions in fiscal 2012 as compared to fiscal 2011 as a result of a broad-based decrease in demand.
Sales increased in all geographic regions, except Japan and Rest of Asia, in
fiscal 2011 as compared to fiscal 2010, primarily as a result of increases in
sales activity in the industrial, automotive and communications end market
sectors. The year-to-year decrease in sales in Japan and Rest of Asia was
primarily the result of lower sales activity in the consumer end market sector
in this region due to the earthquake and tsunami that occurred in Japan in March
2011.
Gross Margin
Change
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change % Change $ Change % Change
Gross Margin $ 1,741,001 $ 1,986,541 $ 1,799,422 $ (245,540 ) (12 )% $ 187,119 10 %
Gross Margin % 64.5 % 66.4 % 65.2 %
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Gross margin percentage in fiscal 2012 decreased 190 basis points compared to
fiscal 2011 primarily as a result of decreased operating levels in our
manufacturing facilities as well as a reduced percentage of sales of our
products sold into the industrial automation and instrumentation sectors of the
industrial end market and the wireless base station sector of the communications
end market, which earn higher margins as compared to products sold into our
other end market sectors.
Gross margin percentage in fiscal 2011 increased 120 basis points compared to
fiscal 2010 primarily as a result of an increase in sales of $231.8 million,
increased operating levels in our manufacturing facilities and the impact of
efforts to reduce overall manufacturing costs, including the savings realized as
a result of our wafer fabrication consolidation actions. Additionally, a higher
proportion of our revenues were from products sold into the instrumentation and
automation sectors of the industrial end market, which earn higher margins as
compared to products sold into our other end markets.
Research and Development (R&D)
Change
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change % Change $ Change % Change
R&D Expenses $ 512,003 $ 505,570 $ 492,305 $ 6,433 1 % $ 13,265 3 %
R&D Expenses as a
% of Revenue 19.0 % 16.9 % 17.8 %
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R&D expenses increased in fiscal 2012 as compared to fiscal 2011 as a result of
annual salary increases that became effective during the second quarter of
fiscal 2012 and a general increase in spending, partially offset by lower
variable compensation expense, which is linked to our overall profitability and
revenue growth.
R&D expenses increased in fiscal 2011 as compared to fiscal 2010. The increase
was primarily the result of higher employee salary and benefit expense due to
salary increases that were effective in the second quarter of fiscal 2011,
increased headcount, and a general increase in spending. These increases were
partially offset by lower variable compensation expense, which is a variable
expense linked to our overall profitability and revenue growth.
R&D expenses as a percentage of revenue will fluctuate from year-to-year
depending on the amount of revenue and the success of new product development
efforts, which we view as critical to our future growth. We have hundreds of R&D
projects underway, none of which we believe are material on an individual basis.
We expect to continue the development of innovative technologies and processes
for new products. We believe that a continued commitment to R&D is essential to
maintain product leadership with our existing products as well as to provide
innovative new product offerings, and therefore, we expect to continue to make
significant R&D investments in the future.
Selling, Marketing, General and Administrative (SMG&A)
Change
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change % Change $ Change % Change
SMG&A Expenses $ 396,519 $ 406,707 $ 390,560 $ (10,188 ) (3 )% $ 16,147 4 %
SMG&A Expenses as
a % of Revenue 14.7 % 13.6 % 14.1 %
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SMG&A expenses decreased in fiscal 2012 as compared to fiscal 2011 as lower
variable compensation expense, which is a variable expense linked to our overall
profitability and revenue growth, was partially offset by annual salary
increases that became effective during the second quarter of fiscal 2012.
SMG&A, expenses increased in fiscal 2011 as compared to fiscal 2010. The
increase was primarily the result of higher employee salary and benefit expense
due to salary increases that were effective in the second quarter of fiscal
2011, increased headcount and a general increase in spending. These increases
were partially offset by lower variable compensation expense, which is a
variable expense linked to our overall profitability and revenue growth.
Special Charges
We monitor global macroeconomic conditions on an ongoing basis, and continue to
assess opportunities for improved operational effectiveness and efficiency and
better alignment of expenses with revenues. As a result of these assessments, we
have undertaken various restructuring actions over the past several years. The
expense reductions relating to ongoing actions are described below.
Closure of Wafer Fabrication Facility in Sunnyvale
We ceased production at our California wafer fabrication facility in November
2006. We paid the related lease obligation costs on a monthly basis over the
remaining lease term, which expired in March 2010. We recorded a one-time
settlement charge of $0.4 million in fiscal 2010 related to the termination of
the lease. This action was completed during fiscal 2010.
Reduction of Operating Costs
During fiscal 2008 through fiscal 2010, we recorded special charges of
approximately $43.3 million. These special charges included: $39.1 million for
severance and fringe benefit costs in accordance with our ongoing benefit plan
or statutory requirements at foreign locations for 245 manufacturing employees
and 470 engineering and SMG&A employees; $2.1 million for lease obligation costs
for facilities that we ceased using during the first quarter of fiscal 2009;
$0.8 million for the write-off of property, plant and equipment; $0.5 million
for contract termination costs and $0.3 million for clean-up and closure costs
that were expensed as incurred; and $0.5 million related to the impairment of
intellectual property. This action resulted in annual cost savings of
approximately $52.0 million per year. We have terminated the employment of all
employees associated with these actions.
During fiscal 2011, we recorded a special charge of approximately $2.2 million
for severance and fringe benefit costs in accordance with our ongoing benefit
plan or statutory requirements at foreign locations for 25 engineering and SMG&A
employees. This action was completed in the fourth quarter of fiscal 2012. This
action resulted in annual cost savings of approximately $4.0 million.
During fiscal 2012, we recorded special charges of approximately $8.4 million.
The special charge included $7.9 million for severance and fringe benefit costs
in accordance with our ongoing benefit plan or statutory requirements at foreign
locations for 95 manufacturing, engineering and SMG&A employees; $0.1 million
for contract termination costs; $0.2 million for lease obligation costs for
facilities that we ceased using during the third quarter of fiscal 2012 and $0.2
million for the write-off of property, plant and equipment. As of November 3,
2012, we employed 6 of the 95 employees included in this cost reduction action.
These employees must continue to be employed by us until their employment is
involuntarily terminated in order to receive the severance benefit. We estimate
this action will result in annual savings in SMG&A expenses of approximately
$12.0 million once fully implemented.
Closure of a Wafer Fabrication Facility in Cambridge
During fiscal 2009 and fiscal 2010, we recorded special charges of $26.8 million
as a result of our decision to consolidate our Cambridge, Massachusetts wafer
fabrication facility into our existing Wilmington, Massachusetts facility. These
special charges included: $7.4 million for severance and fringe benefit costs
recorded in accordance with our ongoing benefit plan for 124 manufacturing
employees and 9 SMG&A employees; $14.6 million for the impairment of
manufacturing assets; $3.4 million for lease obligation costs for the Cambridge
wafer fabrication facility, which we ceased using in the first quarter of fiscal
2010; and $1.4 million for clean-up and closure costs that were expensed as
incurred. This action was completed during the third quarter of fiscal 2011.
This action resulted in annual cost savings of approximately $43 million per
year.
Operating Income from Continuing Operations
Change
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change % Change $ Change % Change
Operating income
from Continuing
Operations $ 824,048 $ 1,072,025 $ 900,074 $ (247,977 ) (23 )% $ 171,951 19 %
Operating income
from Continuing
Operations as a %
of Revenue 30.5 % 35.8 % 32.6 %
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The year-over-year decrease in operating income from continuing operations in
fiscal 2012 as compared to fiscal 2011 was primarily the result of a decrease in
revenue of $292.2 million and a 190 basis point decrease in gross margin
percentage.
The increase in operating income from continuing operations in fiscal 2011 as
compared to fiscal 2010 was primarily the result of an increase in revenue of
$231.8 million and a 120 basis point increase in gross margin percentage.
Nonoperating (Income) Expense
Change
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change $ Change
Interest expense $ 26,422 $ 19,146 $ 10,429 $ 7,276 $ 8,717
Interest income (14,448 ) (9,060 ) (9,837 ) (5,388 ) 777
Other, net (1,459 ) 492 (2,183 ) (1,951 ) 2,675
Total nonoperating expense
(income) $ 10,515 $ 10,578 $ (1,591 ) $ (63 ) $ 12,169
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The year-over-year increase in nonoperating interest expense in fiscal 2012 as
compared to fiscal 2011 was primarily a result of our issuance of $375.0 million
aggregate principal amount of 3.0% senior unsecured notes on April 4, 2011 which
was partially offset by the impact of the termination of our interest rate swap
agreement more fully described below under the heading Debt. The increases were
partially offset by an increase in nonoperating interest income due to higher
interest rates earned on our investments and the investment of higher cash
balances in fiscal 2012 as compared to fiscal 2011, and an increase in
nonoperating other income as a result of the gain from the sale of other
investments in the second quarter of fiscal 2012.
The year-over-year increase in nonoperating expense (income) in fiscal 2011 as
compared to fiscal 2010 was primarily due to an increase in interest expense
incurred as a result of the issuance of $375 million aggregate principal amount
of 3.0% senior unsecured notes on April 4, 2011, and the $145 million term loan
facility entered into by a wholly owned subsidiary of ours in December 2010. In
addition, we earned lower interest income as a result of lower interest rates in
fiscal 2011 as compared to fiscal 2010, which was partially offset by interest
earned on higher cash balances in fiscal 2011.
Provision for Income Taxes
Change
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change % Change $ Change % Change
Provision for
Income Taxes $ 162,297 $ 200,553 $ 190,440 $ (38,256 ) (19 )% $ 10,113 5 %
Effective Income
Tax Rate 19.9 % 18.9 % 21.1 %
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Our effective tax rate reflects the applicable tax rate in effect in the various
tax jurisdictions around the world where our income is earned.
Our effective tax rate for fiscal 2012 increased 100 basis points compared to
our effective tax rate for fiscal 2011 due to the expiration of the U.S. federal
research and development tax credit in December 2011.
Our effective tax rate for fiscal 2011 decreased 220 basis points compared to
our effective tax rate for fiscal 2010 due to the impact of several discrete tax
items. The effective tax rate for fiscal 2011 included the reinstatement of the
federal R&D tax credit in December 2010 retroactive to January 1, 2010,
resulting in a $6.0 million income tax savings; a $6.7 million reduction in the
state tax credit valuation reserve; a $0.5 million tax benefit from the increase
in Irish deferred taxes as a result of the increase in the Irish manufacturing
tax rate from 10% to 12.5%; and a net $10.8 million tax benefit related to the
settlement with the Appeals Office of the Internal Revenue Service of certain
tax matters for the fiscal 2004 through fiscal 2007 tax years.
Income from Continuing Operations, Net of Tax
Change
Fiscal Year 2012 over 2011 2011 over 2010
2012 2011 2010 $ Change % Change $ Change % Change
Income from
Continuing
Operations, net of
tax $ 651,236 $ 860,894 $ 711,225 $ (209,658 ) (24 )% $ 149,669 21 %
Income from
Continuing
Operations, net of
tax as a % of
Revenue 24.1 % 28.8 % 25.8 %
Diluted EPS from
Continuing
Operations $ 2.13 $ 2.79 $ 2.33 $ (0.66 ) (24 )% $ 0.46 20 %
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